On 27 July 2011, the Court of Appeal gave judgment in the case of K/S Victoria Street v House of Fraser (Stores Management) Limited and others  EWCA Civ 904. The decision affects leases granted on or after 1 January 1996.
The Court of Appeal upheld the basic principle from Good Harvest LLP v Centaur Services Limited  EWHC 330 (Ch) that an outgoing tenant’s guarantor cannot directly guarantee the liability of the tenant’s immediate assignee. It makes no difference whether the guarantee is (reasonably) requested by the landlord, freely offered by the guarantor or is possibly to the benefit of the parties in a group assignment situation. A clause which requires such a guarantee will be void. Groups involved in reorganisations will need to think carefully about which combination of companies to offer to the landlord as tenant or guarantor of those premises.
The decision will affect not only future assignments but also direct guarantees which have already been given. Where assignments have already occurred, effectively transferring a guarantee from a former tenant to an immediate assignee, that guarantee will be unenforceable. This will impact on the value of portfolios.
The impact of the decision on repeat guarantees is mitigated by the Court of Appeal giving reasoned support for its opinion that outgoing tenants’ guarantors are however permitted to guarantee outgoing tenants’ liabilities under Authorised Guarantee Agreements (a guarantee of an AGA, commonly known as a GAGA or “sub-guarantee”). The comments are not binding on future courts as the GAGA issue was not directly applicable to the facts of the case. But the comments on their validity have given welcome clarity. Given the strong constitution of the Court of Appeal, these comments are likely to be persuasive in any future case on GAGAs.